National Economic Outlook - June 2014

National Economic Outlook - June 2014

Written By:
Ingo Winzer, President

Local Market Monitor

The majority of Americans live in places where home prices - even if they have increased lately - are still at least 10 percent lower than the peak they reached during the mid-2000s boom. These include New York, Los Angeles, Chicago, Atlanta, Washington DC, Seattle, Charlotte and Salt Lake City. Prices are higher only in San Francisco, Denver, and pretty much all of Texas.

The reason this is important is that large numbers of homeowners in those places hold mortgages that are still under water - they owe more than their home is worth - and therefore can't borrow against any home equity and can't either sell their home or buy a new one. They are essentially out of the real estate market and also can't spend any money. No wonder that home construction is still in a trough and that the economy is just sputtering along.

The latest GDP estimate for the fourth quarter of 2013 shows that consumers increased spending at a modest 2 percent annual rate but that investment in equipment, construction and inventories dropped just as much, leaving GDP down one percent because exports fell. (The government, as usual, made no contribution.)

Despite the optimistic pronouncements, the job situation in May was much the same as it has been for months, with jobs up 1.8 percent from last year. Jobs were up just 3 percent in construction, 1 percent in manufacturing, 2 percent in retail, 3.5 percent in business services, 3 percent at restaurants, and 1.5 percent in healthcare. Note that low-wage jobs make up most of the increase. The unemployment rate is still 6.3 percent.

National Economic Outlook - February 2014

Written By:
Ingo Winzer, President

Local Market Monitor

Estimates for GDP in the fourth quarter paint a positive picture, even though total growth was at a modest 2.4 percent annual rate after a 4.1 percent third quarter. Most encouraging is that personal spending was a good part of the growth. Last quarter, personal spending contributed 1.4 percent to GDP growth, this time it was 1.7 percent; this may not seem like a big difference but personal spending is 70 percent of the economy. For the economy to have sustained growth, consumers have to spend; if they keep up the good work in the next few quarters, the economy will shift into a higher gear.

A few other details from the GDP report. Cars were a very small part of personal spending; good, because car buying blocks out other spending. Inventories grew only a modest amount; good, because an economy that just builds stuff for inventory isn't going far. Exports were at the highest level in years (and imports were low - thank you shale oil); good, because it means more jobs in the US. Lower Federal government spending took a full 1 percent off GDP; due to the government shutdown in October?

A not-so-good GDP detail: residential investment was actually negative. This may be the most significant part of the report for the real estate market. The lack of new construction is mirrored in the jobs report for January, which showed a puny 3 percent increase in construction jobs in the past year. On the positive side, this means the economy is growing well even without the construction sector kicking in; on the negative side, there will not be enough new housing to prevent substantial home price increases in many markets in the next few years.

Ever-higher home prices were a short-term boon for the US economy in the mid-2000s, as homeowners spent their bulging equity, but a long-term disaster we're still dealing with. Recent price increases were largely connected with a scramble for foreclosed properties, a phenomenon with a short shelf-life and limited economic impact; a larger, longer bubble in prices because of housing shortages will produce a new recession within the decade.

National Economic Outlook - January 2014

Written By:
Ingo Winzer, President

Local Market Monitor

A big drop in the unemployment rate, to 6.7 percent, has raised expectations for faster economic growth. These days a rate of 5 percent might be considered "full employment" because the nature of the workforce has changed and many people choose not to have steady work, so we're about 2.8 million jobs short, which isn't a lot. After the last recession, the economy recovered 4.5 million jobs in just two years.

A stronger economy so far doesn't show up in the employment figures. The number of jobs in December was up 1.6 percent from last year, on a par with recent performance. Jobs were up 0.7 percent in manufacturing, 2.6 percent in retail, 3.4 percent in business services, 1.4 percent in healthcare, and 2.9 percent in restaurants. Jobs in government were flat.

Jobs in construction were up only 2 percent. This is where the economy so far has fallen short and where faster economic growth is likely to come from. During the building boom of 2005-07 a million "excess" construction jobs were created, so that level isn't our standard, but we're still down a million jobs from a "normal" amount of construction.

National Economic Outlook - December 2013

National Economic Outlook - December 2013

Written By:
Ingo Winzer, President

Local Market Monitor

Revised estimates of Gross Domestic Product for the third quarter show the economy growing at a 3.6 percent annual rate. This is encouraging but it's not proof of better growth, because inventories increased and personal spending decreased. If consumers don't buy stuff, those bigger inventories will just sit there.

It's easy to read too much into GDP details, but two developments may have longer-term importance for real estate values. One is that state and local government spending is picking up, after years of cutbacks. The other is that there isn't yet much new home construction. Renewed state and local spending will provide more jobs - and demand for housing - while the lack of new construction means that prices for the housing that already exists will be going up.

To a large extent, the home price increases that have been recorded in many markets in the last year or two are the result of investors buying up housing cheap and either flipping it or turning it into rentals. There hasn't been much demand for new housing. But this means that when demand again picks up it will quickly run up against an insufficient supply and that will mean years of sustained price increases.

Continuing the same level of growth we've had for months, the number of jobs in November was up 1.7 percent from last year. Jobs were up 3.4 percent in business services, 3.3 percent in restaurants, 3.0 percent in construction, 2.2 percent in retail trade, 1.7 percent in healthcare and 0.7 percent in manufacturing. Government jobs were flat, a small increase at the state and local level offset by a loss of federal jobs.

National Economic Outlook - November 2013

Written By:
Ingo Winzer, President

Local Market Monitor

It's difficult to know how much the government shutdown affected the jobs figures for October, which are mainly measured at mid-month. Government employees are counted as employed even if furloughed, and the loss of private sector jobs - from reduced government spending - is probably spread throughout the economy.

The number of jobs in October was up 1.7 percent from last year, continuing the pace of previous months. Jobs were up 3.5 percent in business services, 2.5 percent in retail trade, 3.4 percent at restaurants, 1.6 percent in healthcare and basically flat in manufacturing and government.

The relatively low growth in healthcare jobs is worrying because the sector is so large, with 20 million jobs. Early last year the rate of job creation in healthcare was 2.4 percent, at the start of this year it was 2.0 percent, and now it's 1.6 percent. Healthcare has been one of the few areas where people with low skills can find low-paid but stable jobs that allow them to become renters.

A different snapshot of the economy comes from GDP figures for the third quarter, which showed the economy growing at a 2.8 percent rate. Small but significant contributions were made by exports and by increased state and local spending, which we haven't seen for years. 

National Economic Outlook - October 2013

National Economic Outlook - October 2013

 

Written By:
Ingo Winzer, President

Local Market Monitor

The government shutdown means there are no statistics for us to analyze or comment on. So it's a good time to discuss the reliability of the data we use to understand real estate markets.

The most well-know statistic for real estate is home prices; particularly, how much home prices have changed in the past year. Sophisticated methods use actual sales data to calculate this number for the country as a whole and for local markets.

A very big problem right now is that the sales data do not tell us how the value of the average house changed in the past year, because many of the actual sales in the past year were not of average homes. They were sales of foreclosed properties.

The contamination of the data with foreclosures makes it seem that home values are sharply higher in many markets, and that the housing bust is quickly turning into another boom. I believe, instead, that we are in for a long period of very modest value increases that only becomes apparent once the foreclosures are washed out of the system.

We won't know for a while.

National Economic Outlook - September 2013

National Economic Outlook - September 2013

 

Written By:
Ingo Winzer, President

Local Market Monitor

The rate of annual job growth in August, 1.7 percent, was basically the same as in previous months. We had better get used to the idea that this is the new normal, because there probably won't be much help from the lagging government and construction sectors.

Budget difficulties will prevent any meaningful increase in government spending, even though local and state revenues are now in better shape. The recession revealed the extent of unfunded pension liabilities for public employees, which will absorb any extra dollars.

The expected recovery in the construction sector is running up against new realities that will slow hiring. One of these is the falling homeownership rate, currently 65 percent - down from 69 percent in 2004-05 - and almost certainly going lower. Falling homeownership just means that more people rent, but for jobs in construction it means slow hiring because apartments can be built with fewer workers. Despite higher home prices this year, only 65 percent of new building permits were for single-family homes, by far the lowest percent in a decade.

Another unhappy reality for construction is that the number of potential home buyers will be restricted for years because so many existing homeowners are either directly underwater with their mortgage or are so far in debt with home equity loans that it amounts to the same thing. When you owe more than your home is worth, you can't afford to sell it, which means you can't afford to buy a new one, either. Americans took on $600 billion of home equity debt and have paid down only 20 percent of that.

Jobs were flat in manufacturing, despite more car production, as consumers move away from PCs. Jobs in retail were up a solid 2.7 percent, jobs in restaurants an even better 3.5 percent. Business services jobs were up 3.4 percent, healthcare jobs up 2 percent. The unemployment rate dropped to 7.3 percent.